Heterogeneous physicians, lawsuit costs, and the negligence rule
AbstractReal-world observations of negligent and defensive medicine challenge malpractice liability. Based on a principal-agent model with two types of physicians I show that lawsuit costs affect the patients' decision to sue and the physicians' level of care under the negligence rule, leading to a separated equilibrium in care. Given these conditions, punitive damages allow for a pooled equilibrium where all physicians exert first-best care. If courts cannot use punitive damages, a second-best solution arises with an optimal negligence standard that deviates from first-best care.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Law and Economics.
Volume (Year): 28 (2008)
Issue (Month): 1 (March)
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